Federal Reserve 75 Basis Points Cuts Expectation in 2024 Lacked Conviction

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Markets have taken the Federal Reserve (Fed) decision to keep about 75 basis points (bps) cuts in its dot plot as a very positive sign that the Fed is going to actually cut 75 bps during the year and are still acting upon the news. However, we believe the dot plot was in flux during this Federal Open Market Committee (FOMC) meeting, and we think this ‘flux’ was more a reflection of the Fed’s lack of conviction regarding inflation, which could threaten the 75 basis points of expected cuts by year-end 2024. This lack of conviction was further reflected in the 2025 dot plot rate cut expectations, which went from 100 bps in December of last year to just 75 bps in the dot plot just released.

It is clear, and the Fed Chairman has been pounding the airways continuously over the last several months, that Fed officials are lacking conviction that the disinflationary process is here to stay. This lack of conviction regarding the disinflationary path has filtered into their lack of conviction on how much interest rates are going to move down this year. For now, they kept 75 bps as their base case but expect changes coming to the dot plot in June if they don’t gain more conviction on the future path of inflation during the next several months.

Midpoint of FOMC Participants Target Range for Fed Funds Rate

Although we do not believe that, today, there is a possibility for rates to go up from here, the path downward for interest rates is not as clear as it was in 2023, because the economy has continued to surprise on the upside.